What is Flat Rate Pricing? – Credit Card Processing Raw Truth! Beware

I have a question about a specific company — [removed to protect the guilty]. They are saying the rate they can provide is 1.50% on qualified and mid-qualified cards (“flat wholesale rate”). The only other rate is “up to 3.8%” on non-qualified cards, which they say we don’t have to worry about. Then they charge a three-cent credit card transaction fee and no basis points. Is this true and possible?
Thank You,
Dennis K.

Hi Dennis,

Thanks for sending your question along. After having helped countless businesses lower their fees, I’ve learned that anything is possible. What this processor is telling you is inaccurate, misleading, expensive and not in the best interest of your company.

It’s important to learn the basics about how credit card processing charges truly function before you start talking with processors. By the time you’re done reading, you will be able to see exactly what is wrong with what this company is selling.

First, there is no such thing as a “low flat wholesale rate.” (Square has made noise in the industry by offering the first true flat rate at 2.75%. However this is not low! Square should be avoided by any business with an average ticket over $20 and processing more than $5,000 per month. For a better understanding of why, feel free to contact us.) The three components of credit card processing cost are interchange fees, assessments and markups. The sum of interchange fees and assessments is the credit card processing industry’s version of wholesale cost. The 1.50% rate that this processor is quoting is about as far from “wholesale” as rates get. The reason is that this rate is not based on interchange. Instead, the rate is based on the processor’s qualification.

You should avoid tiered pricing like the plague. The qualified, mid-qualified and non-qualified rates that this processor is quoting are based on a tiered pricing structure. Tiered pricing is expensive, opaque and results in hidden fees and surcharges. Non-qualified fees are very much a figment of your processor’s greedy little imagination.

There are two main pricing models that credit card processors use to assess fees. The first is called tiered (also referred to as bundled), and the second is called interchange pass through (also referred to as interchange plus). Tiered pricing allows a processor to inflate your fees through non-qualified surcharges, intercept interchange credits, and raise overall cost without having to raise rates. For these reasons, we do not allow tiered pricing proposals at 1Quest Payment.

Unlike tiered pricing, interchange pass through separates the components of credit card processing expense, allowing a business’s processing rates to be based directly on true “wholesale.” Interchange pass through eliminates surcharging, allows for interchange credits, and results in a flat markup over actual cost.

In helping businesses, we have found that tiered pricing is roughly 42% more expensive than pass through pricing.

“No basis points”
A basis point is a financial term that refers to 1/100 of a percentage point. For example, ten basis points are equal to 0.10%. This processor couldn’t be further from the truth when claiming the markup does not include basis points. In fact, the non-qualified rate of 3.8% is three hundred and eighty basis points! The processor’s representative may mistakenly be mixing terminology for pass through and tiered pricing.

A processor’s markup (its rate) for pass through pricing does not include interchange fees, and tiered pricing combines a processor’s markup (rate) with interchange. For example, 1.50% is a typical bait-and-switch credit card processing rate for tiered pricing. An example of a typical pass through rate would be 0.40%.

Answer

This processor is attempting to sell you a merchant account that will result in high costs and hidden charges. Ideally, you want a merchant account that is based on pass through pricing that does not have a cancellation fee. That is why we at 1Quest Payments like to first identify and analyze your business transaction requirements so that we can offer you better merchant solutions.

1Quest Payment’s mission is to help as many merchants as possible find the best credit card processing solution so they can focus their time and energy on growing their business. Contact Donnie today, call 1.800.413.7573 or use our contact form

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